Farmers And Lenders Will Soon Have A Relationship, Just Short Of Marriage.

The farm lending season is only a couple months away and for many farmers it will be the start of a new relationship with their lender. Your financial partner will ask more questions, want more details, implement more controls, and be much closer to your decision-making process than ever before. Even though you may be a good financial risk, the credit industry is being overhauled from top to bottom and that means a change for the way Cornbelt agriculture conducts its business.

Although your lender will probably not call and say he’s noticed you bought an extra bucket of grease, your next conversation may well indicate the lender knows exactly how much money is in your checking and savings accounts, and how much of your crop is at risk for either price or production. Some lenders have already been operating with that scrutiny, and all will be moving in that direction. The ones who seem like they are already a member of the family may get a bit closer, all in an effort to prevent the loss of their investment in a farming operation that turned inside out.

The Purdue University ag economics staff looked at the impact on agriculture resulting from the mortgage and credit crisis and Wall Street’s meltdown and Purdue economist Mike Boehlje examined the implications on farmers and the implications on lenders. Boehlje says the dynamics in the capital and credit markets, combined with the potential for a global recession, will affect the business relationship between borrowers and lenders, including farmers and agricultural lenders. The price volatility in the commodity markets and the increased costs for agricultural inputs raises the level of risk for farming and Boehlje says lenders will be more cautious in their lending policies. That will take the form of many more questions that will be asked about risk management, demands for additional collateral, and possible limitations on the amount of credit available.

• Typical ag lenders have not been impacted as seriously by the mortgage lending problems, nor the freezing up of credit and capital available to them. However a farmer who has suffered a financial challenge may find more difficulty in getting a lender to provide credit.
• Ag lenders are aware that commodity prices the past two years have provided revenue for farmers to have good repayment capacity, but because of the current financial environment lenders may want more documents that indicate cash flow and risk management tools that have been implemented such as forward contracts and crop insurance.
• Interest rates are not expected to significantly increase as the Federal Reserve keeps interest low to spur the national economy, but the cost of funds will be higher to the Farm Credit system which depends on bonds that carry higher rates of interest. Those costs may be passed on to borrowers. Longer term interest rates are expected to increase slightly.
• Loans may carry additional restrictions that control the use of the money, such as a mandate to carry crop insurance or to obtain prior approval for any capital purchases, regular updates on inventories held, reports on challenges to production, examination of bank accounts, and regular visits to the farm to inspect the premises. Boehlje says the additional regulatory oversight will substantially increase the workload of loan officers, and subsequently increase the cost of lending for the credit institutions.
• With the increase in crop input costs, many farmers will be seeking increased levels for their operating loan, and lenders may subsequently require more documentation about capital outlays for those inputs. Boehlje says lenders may further inquire about the solvency of the input supplier, and whether or not pre-payment of inputs will significantly reduce 2008 income tax liabilities.
• Competition among lenders may increase because of the differences in the cost of funds and the appetite for risk that lenders are willing to maintain. This could impact differences in interest rates, but the intensity of competition will primarily be driven by the overall financial atmosphere.
• Lenders may be forced to decline loan requests more often during the current financial stress, or in the alternative approve only partial credit requests. Boehlje says refusing a loan request may sometimes be in the best interest of the lender and borrower.

Summary:
While agricultural lenders have generally been insulated from much of the credit and capital crisis, farmers and farm loan officers can expect that it will have an impact on “business as usual.” Credit will be available to worthy customers at low and more competitive interest rates, but lenders will require more documentation, impose more restrictions on the use of their money, and more closely monitor their relationship with borrowers. Lenders will have an increased workload as a result, and the increased cost of lending will have to be absorbed by lenders.